We have basically closed out the Max Out of Pocket “Fundamentals of FICA” course. I will eventually brand it as “Fun with FICA”. We have even started using those skills in application on our stroll through the cafeteria to buy health insurance from our employer. There will be a lot more of that to come. But after all the writing about Nitrous Oxide last week, I need a break. And maybe even a hit if Nitrous.

We learned awhile back that most Max Out of Pocket readers pay about 6.2% of their earned wages in FICA Social Security taxes to help support the Social Security Trust Fund. If you are bringing in some serious cash from your job, it can be less since there are limits on how much income is subject to the Social Security FICA tax. If you already retired early, you probably aren’t paying this tax at all anymore.

I mentioned in that post that this tax has been extremely steady since the early 90s and that it is basically baked into the economy at this point. Well, I was recently thinking back to a scary time called the Great Recession. A time when things got so bad that even Max OOP got a short break on the Social Security tax to the tune of over $2,000.

Tough Times

Back in 2008 and 2009 things were really bad. I probably had no idea what was really going on around me. A younger Max OOP had just recently moved to a new southern state to take on a new position at a medium-sized hospital system. At the time, I didn’t realize just how bad the economy was and that it probably wasn’t the best time to be taking a risk on switching jobs. People were starting to lose their jobs, and here I was taking one. Housing prices were crashing and stocks started losing value. I even recall a small layoff at my hospital system shortly after I started. I was somehow spared from the chopping block, probably due to an unrelenting work ethic. The bottom fell out of the stock market a few months after I moved. After the stock market crash, there was a multi-year effort by our world leaders to try and fix things. The United States did its part too.

Short timeline of VTSAX Total Stock Market Index Fund, FICA reduction, and Max OOP’s move. You can’t time the market.

Our Leaders Turn To FICA

One of the many efforts that took place here in the states lasted for two years, from 2011 through 2012. To try and stimulate the economy, a short term reduction in our Social Security FICA tax was put into place. Our leaders basically put some of this tax back into our pocket for a few years hoping we would spend it on flat screen TVs and DVDs. If you were working in 2011 or 2012, it is very likely you benefited from this. Yeah, this was right around the time Netflix tried to split the company and raised prices on all their loyal customers. You might recall the backlash – the stock price lost 75% of its value that year.

The Social Security FICA tax was reduced by two full percentage points from 6.2% all the way down to 4.2%, or more than 30%. This is a really big number if you consider how many workers it impacted. There was an estimate thrown out by the Congressional Budget Office in March of 2012 that this reduced inflows to the Social Security Trust fund by about 224 billion. Your employer still paid their full 6.2%. Evidently, the government didn’t trust them to throw their 2% back into the economy. Maybe they would just pad their bottom line with it?

If you were making $100,000 at the time, this was $2000 back into your pocket each of those years. If you were making $50,000, $1000 was put back in your pocket for 2011 and 2012.

They didn’t touch Medicare FICA; they left that flat at 1.45%. My guess is it was just easier to generate what they needed from the larger 6.2% Social Security tax bucket. It is also probably easier to estimate the impact and sell the idea when you are only touching one program.

How Did This Impact Max OOP?

Since this was in the early days of Max OOP’s career, this tax reduction probably put about $2000 back in my pocket. It was before I knew how to front-load my retirement accounts, so it probably made its way into my cash savings since that was my main focus in those days. Unfortunately, I probably didn’t do much economy stimulating with my extra $2000 back in 2011-2012. After all, I already bought a TV in 2009, a TV I still own to this day. I wish I had put the whole FICA tax break into Netflix.

Wow. My $2000 could be worth so much more.

These days, I have boring passive income streams that put this kind of money back into my pocket every year. I am building my own stimulus package. I am projected to get $1100 over the next 12 months in ‘rental dividends’ from my healthcare REIT experiment alone. As we learned, since REIT dividends aren’t considered earned income, they won’t get hit with the FICA social security taxes even if you were holding them in a brokerage account.

Our leaders did several other interesting things to try to make things right. Anyone remember the “Making Work Pay” tax credit? This was authorized by the American Recovery and Reinvestment Act of 2009 and put $400 of my federal income tax back into my pocket in 2009 and 2010. That’s another $800 and paid for most of my TV. There was a lot to this bill, including an $8000 tax credit for first time home buyers in 2009 (I missed out on that one). We are talking real dollars here. There were also several healthcare spending initiatives imbedded in that bill to the tune of 155 billion dollars. Over 25 billion of that was used to promote the expansion and adoption of Health Information Technology. After going through the build of two Electronic Health Record (EHR) systems that nearly burned me completely out of healthcare, perhaps this funding was the start of my downfall? Or, maybe it was the start of my path to early retirement.

Lessons Learned

History tends to repeat itself. If our political leaders ever tweak this number again (up or down), you will quickly know exactly what the impact would be to your pocketbook. As they said when I was in the south, “Where is my pocketbook”? I also think we need to remember where this multi-year bull run started and caution amateur early retirement enthusiasts who might have a false impression that this stock market will only go up. Over the long term, that is true. But hopefully we don’t see another hiccup (or should I say seizure?) in the economy like the Great Recession that could push someone into an irrational decision like buying at the top and selling in a panic at the bottom. It wouldn’t hurt to build in some conservative investments here and there so we are ready for when that time comes. More on that later.

You can’t time the market. Eventually, we will see a decline.

Do you recall the FICA tax reduction of 2011-2012? How much did it put back in your pocket?

2 Responses

I remember the cut now that you mention it. It was less noticeable to me because I pay both my employer and employee FICA as an S-corp. So the 2% drop wasn’t as noticeable. But it was something for sure. Unfortunately, I don’t know what happened specifically to that money. Probably just socked away into savings. That’s what I did with any leftover money. Those savings went into my then-husband’s mouth (full dental implants to the tune of $26k) or windows ($10k). So I guess you could say the tax cut paid for my ex-husband’s mouth or my house’s energy efficiency.

Interesting, I wonder if there were any unique rules surrounding this back then in regards to the S-corp. My FICA break would have landed in savings back then as well! 26k is a lot of money! Now that you say that, I think Mrs. Max OOP spent some of her FICA money on Invisalign around the same time, but it would have been closer to 5K and through tax deferred health savings accounts. I wonder how many people even notice a cut like this when it is spread out over the whole year. Makes me wonder if they handed it out as one large check January 1st or December 31st if it would of had a more intense effect on the economy. Thanks for dropping by Abigail.

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